A Challenging Cycle: Pellets, Cheap Oil & A Warming Planet

The domestic wood pellet heating market is battling low crude oil prices and warm winters to keep—and grow—its position in the thermal arena.
By Ron Kotrba | March 23, 2016

At $49.51 a barrel, 2015 saw the lowest average crude oil prices in more than a decade. Couple low crude prices with the fact that the National Oceanic and Atmospheric Administration pegs 2015 as the planet’s warmest year on record and the result of these two converging factors equates to troubling times for the domestic wood pellet heating market.

Wood pellet appliance sales appear to have a significant correlation with oil prices when looking at the historical data. In general, as oil prices trend up, U.S. wood pellet appliance unit shipments do the same, according to appliance data provided by the Hearth, Patio & Barbecue Association, OPEC crude oil average yearly prices from Statista, together, which were compiled by Pellet Mill Magazine. The divergence from the trend in 2014, however, may likely be attributed to a sharp decline in crude oil prices in the fourth quarter of that year (Graph 1). “After reaching monthly peaks of $112 per barrel (bbl) and $105/bbl in June, crude oil benchmarks Brent and West Texas Intermediate fell to $62/bbl and $59/bbl in December, respectively,” stated the U.S. Energy Information Administration. The same general trend can be seen in Canadian wood pellet appliance unit shipments (Graph 2).

Conversely, the unit shipments of gas appliances trend down as crude oil prices increase (Graph 3), even though Kate Fritz, the market research director at HPBA, cautions against drawing much of an inference from this. “From a statistical perspective, I would caution against trying to correlate gas appliance unit shipments to fuel prices,” she says. “There are too many variables to draw a straight line between the two series.” Again, the same general trend can be seen in gas appliance unit shipments and oil prices in Canada (Graph 4).
Interestingly, there seems to be less of a correlation between cordwood appliance sales and oil prices—or even almost an inverse correlation (Graphs 5 and 6). This could be because the cordwood appliance data include not only wood stoves but also fireplaces, which may provide more of an ambiance factor in addition to a home improvement modification rather than a straight-functioning heat utility. These numbers could be tied to the housing construction market as well. One might also argue this may be due to pellet appliances increasingly taking share away from cordwood, but in Graph 7, we see this really isn’t the case.

In Graph 8, the U.S. pellet appliance unit shipments are graphed against the average temperature in the lower 48 states from January through March of each year using data obtained from NOAA. While it would be more effective to graph regional pellet appliance shipments to regional U.S. cold season temperatures, HPBA only had aggregate data and was unable to provide historical regional shipment information. Since weather is such a big factor, what one could expect to see is higher pellet appliance shipments correlated with lower average temperatures and vice versa. This is seen in 2001 as the average temperature dropped and sales of pellet appliances spiked. Conversely, in 2002, the average temperature rose and pellet appliance shipments declined. Again, in 2003, the temperature fell and pellet appliances increased. The divergence from this trend in 2004-’06, when increasing average temperatures saw an increase in pellet appliance sales, could be for a number of reasons, including crude oil prices continuing an upward trajectory, or better, cheaper and more pellet stove options entering the market, to name a few. In 2008, oil prices peaked, temperatures dropped, and what we see is the largest number of pellet appliance unit shipments in the 15-year period displayed. Furthermore, in 2012 the average temperature spiked to the highest point in the time period and pellet appliance shipments dropped back. Then, in 2014, the temperature fell to the lowest average in the 15-year period and pellet appliance sales soared again.

The 25C tax credit available for biomass stoves should also be factored into trends in pellet appliance shipments. First passed in October 2008 retroactive to the first of the year, the credit for 75 percent efficient wood and pellet stoves began as a $300 credit. In early 2009, it was passed again, this time for $1,500 and extended through 2010, but the banking crisis of 2008 followed by the prolonged recession years afterwards had an adverse effect on pellet appliance shipments in the ensuing years. From 2011 onward, the tax credit was scaled back to $300, and the retroactive extensions of the credit, like many renewable tax credits, likely hampered its incentive as originally intended.

“Tax credits are supposed to be an incentive to purchase, not a gift to those who have already bought a wood or pellet stove,” says Rachel Feinstein, HPBA’s manager of government affairs. “The retroactive nature of the tax credit extensions is why it’s so difficult to determine if this tax credit has an impact on sales—it makes it very difficult to establish a trend.”

Stephen Faehner, chairman of the Pellet Fuels Institute and CEO of American Wood Fibers, says the 23 state incentives for pellet and wood stoves are more help than one federal tax credit. “Robust state programs have been in effect for several years,” he says. “The most aggressive program is in New Hampshire, a 30 percent rebate up to $6,000 for an automated, bulk-fed boiler system. Maine has a robust program, a $5,000 rebate for pellet boilers and a $500 rebate for stoves. Maryland has a $700 rebate through the Maryland Energy Administration for pellet stoves. There’s a number of aggressive state programs throughout the country to encourage conversion to pellets.” 

John Shimek, the senior vice president of new product development at the nation’s largest cordwood and pellet appliance manufacturer, Hearth & Home Technologies, says the 25C tax credit has been favorable in driving sales. And given the fact that the credit was not only passed this December retroactively back to Jan. 1, 2015, but also forward through this year, Shimek is hopeful of its positive effect on 2016 sales. “While it’s too soon to tell, our team feels really good about it,” he tells Pellet Mill Magazine. “The forward-facing reinstatement allows us as a manufacturer to get ahead of it and know which appliances qualify. At the same time, it helps consumers understand the value and benefit of the credit, and that will be very positive long-term.”

While trends have been laid out from 1999-’14, information for 2015—the first year in many when record temperatures and sustained low crude oil prices have dominated—is lacking. HPBA only publishes hearth data every other year. “2014 shipment data is the most current we have to release,” says Carrie deGuzman, HPBA’s senior manager of communications. “Although we have collected 2015 data, we have not calculated the aggregated figures for publication and release.” She adds that consumer data is available every other year to members. “So the 2016 report is in the planning stages,” deGuzman says. In the “off-years” for hearth data, HPBA publishes barbecue shipment information.

“Low fuel prices have certainly impacted pellet appliance sales, which are lower than in previous years,” Shimek says of 2015 pellet appliance sales. “However,” he adds, “wood stove sales seem to be stable.”

“They’re off across the board,” Faehner says of 2015 pellet sales at his company. “That is consistent with most suppliers in the market place. Sales are off a good 20 percent compared to years past.” But given the warm winter, comparing the off sales of a soft year to higher sales of some of the tougher winters is dangerous, he says. “If you were to normalize it, it’s not as bad.”

While 2015 appliance data for the U.S. was unavailable at press time, Deutsches Pelletinstitut GmbH (DEPI), or the German Pellet Institute, released data for the German market in 2015, and the numbers were not good. “Instead of the projected 40,000 new pellet boilers and stoves, only 16,000 pellet boilers and 16,500 pellet stoves were sold nationwide,” DEPI stated in a release earlier this year. “That is compared to the weak year in 2014 (38,500 furnaces), a further decline by about 10 percent.”

Faehner says the EU is coming off its third straight warm winter, and in the U.S., although this winter is warmer, the previous two were much harsher. “It’s a cycle,” Faehner says. “It’s a challenging cycle and it’s not for the faint of heart. You have to have some pretty thick skin—and deep pockets—to make it through some of these cycles.”

Shimek says a few factors influenced wood appliance sales last year, but the U.S. EPA’s release of its New Source Performance Standards wasn’t one of them. “Weather always has an impact, and the mild winter—especially in the South Central U.S. and East Coast—certainly played a role,” he says. “At this point, the new NSPS had minimal impact at the consumer level. And while weather is always the biggest factor and is difficult to predict, we are optimistic about the wood appliance market in 2016. We anticipate it will be stable and potentially even stronger this year.”

For pellet production, Faehner says 2016 will be a year when “a lot of folks are scrambling to stay viable,” noting early indications are pointing to some producers reducing production plans already. “There’s instability in global pellet markets and some not-so-healthy trends are appearing,” he says. “Also, the strong U.S. dollar limits exports and helps Canadian producers export more to the U.S. But if we can keep promotion of this business moving forward, and consistent policy, it’s a good solution for renewable energies. I’m optimistic about this year but not overjoyed.”

“The biggest challenge we face is increasing awareness with consumers,” Shimek says. “There are so many options today and current appliances are much better than in years past—these are not their parents’ and grandparents’ stoves. We need to continue to help them understand that there are alternatives to natural gas and fuel oil.”

“These are pretty dramatic times,” Faehner says. “We have a climate change issue. There are going to be years where there are positives and negatives, in general. We have global warming, I get that. But stability is one thing people are after. Pellets provide a stable solution to heating needs. Oil, while low now, will not stay low. It will fluctuate and go back and forth. But pellets are darn reliable. They may move a little, but over time it’s a very stable product. We have to reach more consumers. Our history in the U.S. has been with freestanding stoves and inserts, but there’s a whole other market for house boilers, forced air or hydronic, and that’s an untapped market here in the U.S. In a climate where oil is cheap—historically cheap—we’re stable, and fossil fuels have not been.”

Ironically, the wood pellet industry, a sector positioned to help combat climate change, is dampened by both a low-priced product that heavily contributes to climate change (crude oil) and the effects of climate change (warmer winters).

Author: Ron Kotrba
Senior Editor, Pellet Mill Magazine
218-745-8347
rkotrba@bbiinternational.com